UPDATE: Haverford School District business manager Robert Henderson says the district's financial situation is improving; the rate cut won't immediately boost borrowing costs; it's "not cost effective" to terminate the swaps yet; and he hopes Moody's will reconsider next year.

EARLIER: Moody's Investor Service has cut Haverford Township School District's credit rating for $113 million in previously issued bonds debt by two notches - from "high-quality" Aa2 to "upper medium grade" A1 - and threatened further cuts, which could drive up the Delaware County school district's future borrowing costs.

In a report, Moody's analyst Shannon McCue cites Haverford's "high debt burden," two years of budget deficits, and "significant variable-rate and swap exposure."

Interest rate swap expenses have bedeviled a number of Pennsylvania school districts since then-Gov. Rendell and the General Assembly made these contracts legal for local governments in 2003. Swaps were sold by Wall Street bankers as a way to reduce borrowing costs in case interest rates rose, but have instead increased some towns' financial expenses, especially since U.S. interest rates hit historical lows.

McCue also warned that Moody's may cut Haverford's rate again, despite the township's higher-than-average "wealth levels," because recent cost cuts and property tax increases weren't enough: "The negative outlook," following "two years of large operating deficits," underlines "the district's challenges to regain structural balance despite increasing the tax levy above the index and making expenditure reductions."

She called on the district to "increase reserves and actively manage the district's swaps portfolio" while balancing the budget.

Repeated rate cuts could make the district's debt unwelcome to conservative investors, driving up borrowing costs. School business manager Richard Henderson was not immediately available for comment.